Reducing the cost of operating your business is the most efficient way of increasing your cash flow
At this point in the cycle of our economy and with most companies experiencing revenue growth, it is easy to become complacent with respect to controlling costs. Rationalizing your businesses costs should be a continuing process, not just a reaction to slowing sales or the need to increase your cash flow.
The general rule of business is to control costs, increase revenues, and maximize profit. Simple, but difficult to implement in weak economic times as well as in recovering economic times, such as we are experiencing now in the United States. As revenues increase, the tendency of businesses it to add workers, purchase technology, and increase inventories. However, many companies grow themselves out of business by diverting cash into fixed assets and inventory investments in anticipation of expanding sales.
One way to avoid this situation is to reduce and control non-strategic costs. Through technology and the emergence of the outsourcing industry, companies can reduce costs, increase efficiencies, and increase profits to be in a better position to deal with the inevitable cyclical economic downturn.
Let us look at the top 10 ways to reduce costs in the light of what the current circumstances are (not what they used to be):
1. Manufacturing
The economics have changed substantially between producing goods in China and in the United States. A recent study indicated that offshore manufacturing companies are looking at a 15 to 20 percent average wage increases and will reach wage parity with the United States within one year. Energy costs outside the country are growing quickly as conversions from coal to natural gas are implemented in China. China and the United States are engaged in a trade war with tariffs imposed on imported goods making them theoretically more expensive in the United States than goods produced in the United States.
Consider onshoring manufacturing back to the United States to reduce costs and better manage operations without different time zones, cultural barriers, and increased freight and inventory investment. The relative costs have almost come full circle.
2. Freight and Packaging
Look at your trucking or small package competitive landscape for cost savings. Make sure you are organizing the business to take full advantage of full truckloads on the outbound. Take a look at the established minimum values for shipping levels to customers. Look at how much you uplift the shipping charge when you pay the shipping bill and recover the uplifted shipping charge from the customer.
3. Finance and Accounting
The cloud simplifies outsourcing of accounting and makes cost reductions easier and to achieve. This makes a lot of sense if you are having to scale up, or if you do not have accountants on staff to improve reporting or make sure you are GAAP compliant.
4. Human Resources
A Professional Employee Organization (PEO) can help process your payroll and offer your employees a better offering of benefits. In addition, by pooling with other companies through a PEO, you can get significant pooling discounts on the cost of benefits. Additionally, you can have someone else take responsibility for the maze of changing HR regulatory issues including ACA compliance.
5. Legal Fees
If you are involved in litigation, patent work, IPO introduction, or corporate reorganization, you will need a legal specialist. That specialist will be housed in all likelihood in a top law firm and their hourly charge rates are significant. Don’t, however, fall into the trap that you need to pay those rates for corporate counsel work. Legal fees are negotiable and many firms will fix the fee for basic corporate work or accept a fixed monthly retainer for basic legal services.
6. Bank Fees
If you are a small- or medium-sized concern and working with one of the national clearing banks, you need to ask yourself why? These large banks are loaded with professionals to help large companies with complex international transactions, technical work such as risk and derivatives management, and other complex financial instruments, but these services may not be what you need to run your emerging growth company. Their rates are about twice the rate of a local or regional bank.
7. Insurance
When was the last time you had a competitive quote from an alternative insurance broker? Insurance companies will only allow one “broker of record” at a time. That means when you want to have your current broker and another designated broker quote, you will have to choose which broker gets quotes from which insurance company. Insurance brokers naturally form strong relationships with specific insurance companies, if for no other reason than volume brings additional discounts.
Put your insurance needs out for bid to two brokers and insurance companies, and consider higher retentions and lower coverage limits if higher limits are not needed.
8. Audit Fees
The big four audit firms are similar to the large national clearing banks. These audit firms are set up with research groups and power groups to deal with complexity both driven domestically and internationally, and they have commensurate high-level fees.
The fee levels can be put into four groups: the top four, the next 3 national firms, regional firms, and small local CPAS. Make sure a CPA firm appropriately sized for your business performs your audit. The hourly rates are dramatically different between larger and smaller firms.
9. Social Marketing
Your website, social networking, and LinkedIn usage can save you enormous sums for marketing your company. Look at the outbound marketing costs and see what you can substitute. Advertising budgets, trade show involvements, and general events are prime areas for trimming or eliminating while effectively using enhanced inbound marketing approaches.
10. Selling to the Right Customers
When you analyze your customer base you will find you have highly profitable customers, somewhat profitable customers, and outright loss makers. The loss makers are obviously the ones you want to convert or ditch. Smart firms will not only rid themselves of loss-making customers but, by mapping the onboarding sales prospect process, incorporate activities and incentives for salespeople to bring only profit-producing customers on board. Whether you are reducing the selling cost or diverting resources to attain more profitable sales, you are moving to increase the cash and the profitability of the firm.
Taking advantage of just a few of these cost reductions will give you truly substantially cash and profits savings.
Michael Evans is the Managing Director of the Northern California office of Newport LLC.
